Investing.com - Ashtead (LON:AHT) has proposed moving its listing to the US from the UK, and Goldman Sachs sees the potential for more companies going down the same route.
The valuation gap to the US has become larger, the US bank said, and only a small proportion of this is due to sector distribution; every sector in the UK is on a double-digit P/E discount to its US counterpart sector.
This discount is of course a Europe-wide phenomenon, but the gap between the UK and US is especially large.
A lack of allocation to UK equities by long-term domestic capital (pensions/insurance funds) and by households is a large reason for the discount, we think. Only about one-third of the UK equity market is held domestically, compared with over 80% in the mid-1990s.
Assuming we do not see fund flows into UK stocks, there are only so many ways to try to narrow the valuation gap to the US – relist, take-private (where valuation gaps are lower), be taken over or do more buybacks (if you think your shares are under-valued).
“We are seeing all of these happen … but, of course, these create their own momentum, shrinking the UK market further and reducing total trading turnover,” Goldman said.
Exposure to North America for FTSE 100 is in aggregate 29%, which is higher than UK exposure (22%) or Europe-ex UK (16%).
“There are plenty of opportunities for UK stocks to re-list,” Goldman said. “That all being said, smaller stocks would find themselves tiny within the context of the much larger US market, while bigger stocks that hope to be in the S&P 500 would have no guarantee of inclusion and would likely face a long wait until it happened.”
In order to stem this migration and reduction in equity supply, there would need to be more allocation to equity by UK-based capital, in our view. This is something that both the current and previous governments have recognised, but material policy action has been lacking.
“It will take substantial commitment to reverse the outflow from UK equities that has been happening since the 1990s. Changing rules for insurance companies, reducing subsidies for allocating to cash/bonds and increasing those for allocating to equity could all be part of any remedy, in our view,” the US bank added.